SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-31525
AMERICAN RIVER HOLDINGS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0352144
------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
1545 River Park Drive, Sacramento, California 95815
--------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
(916) 565-6100
-------------------------------
(Registrant's telephone number,
including area code)
not applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 2,279,960 shares outstanding at November 13, 2000.
Page 1 of 54
The Index to the Exhibits is located at Page 28
<PAGE>
PART 1-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS:
AMERICAN RIVER HOLDINGS
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except number of shares) September 30, September 30, December 31,
2000 1999 1999
---------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 12,620 $ 12,160 $ 8,274
Federal funds sold 6,018 8,215 7,125
Interest-bearing deposits in banks 5,243 5,124 5,527
Investment securities (market value of $46,465
at September 30, 2000, $47,733 at September 30,
1999, and $57,372 at December 31, 1999) 46,537 47,798 57,567
Loans, less allowance for loan losses of $1,957 at
September 30, 2000, $1,615 at September 30,
1999, and $1,679 at December 31, 1999 132,678 109,517 117,308
Bank premises and equipment, net 628 391 463
Accounts receivable servicing receivables, less
reserve for losses of $58 at September 30, 2000 and
$0 at September 30, 1999 and December 31, 1999 2,908 1,870 2,123
Accrued interest receivable and other assets 3,834 2,704 2,975
---------- ---------- ----------
$ 210,466 $ 187,780 $ 201,362
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 49,687 $ 46,924 $ 47,994
Interest bearing 138,502 121,337 133,002
---------- ---------- ----------
Total deposits 188,189 161,261 180,996
Short-term borrowed funds
Long-term debt 2,094 2,135 2,125
Accrued interest payable and other liabilities 1,313 1,224 1,628
---------- ---------- ----------
Total liabilities 191,596 171,620 184,749
---------- ---------- ----------
Commitments and contingencies (Note 2)
Shareholders' equity:
Common stock - no par value; 20,000,000 shares
authorized; issued and outstanding - 1,793,274
shares at September 30, 2000 and December 31,
1999 and 1,806,876 shares at September 30, 1999 6,722 6,725 6,722
Retained earnings 12,261 9,584 10,171
Accumulated other comprehensive loss (Note 4) (113) (149) (280)
---------- ---------- ----------
Total shareholders' equity 18,870 16,160 16,613
---------- ---------- ----------
$ 210,466 $ 187,780 $ 201,362
========== ========== ==========
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
For the periods ended September 30,
Three months Nine months
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,357 $ 2,534 $ 9,233 $ 7,856
Interest on Federal funds sold 65 134 117 213
Interest on deposits in banks 91 72 264 214
Interest and dividends on investment securities:
Taxable 593 541 1,964 1,427
Exempt from Federal income taxes 113 91 339 224
Dividends 16 12 49 38
------- ------- ------- -------
Total interest income 4,235 3,384 11,966 9,972
------- ------- ------- -------
Interest expense:
Interest on deposits 1,542 1,049 4,140 3,012
Interest on short-term borrowings 9 -- 94 7
Interest on long-term debt 32 32 97 98
------- ------- ------- -------
Total interest expense 1,583 1,081 4,331 3,117
------- ------- ------- -------
Net interest income 2,652 2,303 7,635 6,855
Provision for loan losses 121 109 349 297
------- ------- ------- -------
Net interest income after provision for loan losses 2,531 2,194 7,286 6,558
------- ------- ------- -------
Non-interest income 475 394 1,428 1,063
------- ------- ------- -------
Non-interest expenses:
Salaries and employee benefits 949 875 2,850 2,556
Occupancy 114 106 335 309
Furniture and equipment 68 68 192 189
Merger expenses 124 0 296 0
Other expense 457 415 1,289 1,188
------- ------- ------- -------
Total non-interest expenses 1,712 1,464 4,962 4,242
------- ------- ------- -------
Income before income taxes 1,294 1,124 3,752 3,379
Income taxes 502 417 1,438 1,284
------- ------- ------- -------
Net income $ 792 $ 707 $ 2,314 $ 2,095
======= ======= ======= =======
Basic earnings per share (Note 3) $ .44 $ .39 $ 1.29 $ 1.15
======= ======= ======= =======
Diluted earnings per share (Note 3) $ .42 $ .37 $ 1.23 $ 1.08
======= ======= ======= =======
Cash dividends per share of issued and
outstanding common stock $ .13 $ .11 $ .13 $ .11
======= ======= ======= =======
</TABLE>
See notes to Consolidated Financial Statements
3
<PAGE>
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
----------------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income
---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,722,406 $ 6,031 $ 9,167 $ 178 $ 15,376
Comprehensive income (Note 4):
Net income 2,901 2,901 $ 2,901
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale
investment securities (458) (458) (458)
----------
Total comprehensive income $ 2,443
==========
Cash dividends (416) (416)
5% stock dividend 85,879 1,474 (1,474)
Fractional shares redeemed (7) (7)
Stock options exercised 74,742 692 692
Retirement of common stock (89,753) (1,475) (1,475)
---------- ---------- ---------- ----------- ----------
Balance, December 31, 1999 1,793,274 $ 6,722 $ 10,171 $ (280) $ 16,613
Comprehensive income (Note 4):
Net income 2,314 2,314 $ 2,314
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 167 167 167
----------
Total comprehensive income $ 2,481
==========
Cash dividends (224) (224)
---------- ---------- ---------- ----------- ----------
Balance, September 30, 2000 1,793,274 $ 6,722 $ 12,261 $ (113) $ 18,870
========== ========== ========== =========== ==========
</TABLE>
See notes to Consolidated Financial Statements
4
<PAGE>
AMERICAN RIVER HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
For the nine months ended September 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,314 $ 2,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 349 297
Deferred loan origination fees (costs), net 78 (76)
Depreciation and amortization 159 150
(Accretion) amortization of investment security
(discounts) premiums, net (188) 3
Gain on sale of securities (6) --
Gain on sale of equipment (8) (3)
Loss on sale of other real estate -- 3
Provision for losses on other real estate -- 6
Increase in accrued interest receivable and
other assets (983) (144)
Increase in accrued interest payable
and other liabilities (100) 76
--------- ---------
Net cash provided by operating activities 1,615 2,407
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of available-for-sale
investment securities 441 998
Proceeds from called held-to-maturity investment
securities 155 --
Proceeds from matured available-for-sale investment
securities 20,000 20,270
Proceeds from matured held-to-maturity investment
securities 2,365 3,080
Purchases of available-for-sale investment securities (12,368) (25,816)
Purchases of held-to-maturity investment securities (487) (8,562)
Proceeds from principal repayments for held-to-
maturity mortgage-related securities 1,385 2,499
Net decrease (increase) in interest-bearing deposits in banks 284 (110)
Net (increase) decrease in loans (15,745) 2,607
Net increase in accounts receivable servicing
receivables (826) (681)
Proceeds from the sale of equipment 15 3
Purchases of equipment (318) (85)
Proceeds from sale of other real estate -- 390
--------- ---------
Net cash used in investing activities (5,099) (5,407)
--------- ---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 6,354 $ 1,483
Net increase in time deposits 839 7,827
Repayment of Federal Home Loan Bank advance (31) (29)
Net increase in short-term borrowings -- --
Payment of cash dividends (439) (386)
Cash paid for fractional shares -- (4)
Cash paid to repurchase common stock -- (1,145)
Exercise of stock options -- 366
--------- ---------
Net cash provided by financing activities 6,723 8,112
--------- ---------
Increase in cash and cash equivalents 3,239 5,112
Cash and cash equivalents at beginning of period 15,399 15,263
--------- ---------
Cash and cash equivalents at end of period $ 18,638 $ 20,375
========= =========
</TABLE>
See notes to Consolidated Financial Statements
AMERICAN RIVER HOLDINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly American River Holdings (the "Company's")
consolidated financial position at September 30, 2000, September 30,1999 and
December 31, 1999, the results of operations for the three and nine month
periods ended September 30, 2000 and 1999 and cash flows for the nine month
periods ended September 30, 2000 and 1999.
Certain disclosures normally presented in the notes to the financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report to Shareholders. The results of
operations for the three and nine month periods ended September 30, 2000 and
1999 may not necessarily be indicative of the operating results for the full
year.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant changes in the near term relate to
the determination of the allowance for loan losses.
6
<PAGE>
2. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding various commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of approximately $46,697,000 and letters of credit of $892,000
at September 30, 2000. However, all such commitments will not necessarily
culminate in actual extensions of credit by the Company during 2000.
Approximately $16,956,000 of loan commitments outstanding at September 30, 2000
are for real estate construction loans and are expected to fund within the next
twelve months. The remaining commitments primarily relate to revolving lines of
credit or other commercial loans, and many of these are expected to expire
without being drawn upon. Therefore, the total commitments do not necessarily
represent future cash requirements. Each potential borrower and the necessary
collateral are evaluated on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities or business
assets.
Stand-by letters of credit are commitments written to guarantee the performance
of a customer to a third party. These guarantees are issued primarily relating
to purchases of inventory by commercial customers and are typically short-term
in nature. Credit risk is similar to that involved in extending loan commitments
to customers and accordingly, evaluation and collateral requirements similar to
those for loan commitments are used. Virtually all such commitments are
collateralized.
3. EARNINGS PER SHARE COMPUTATION
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period (1,793,274 and 1,793,274 shares
for the three and nine month periods ended September 30, 2000, and 1,813,036 and
1,826,258 shares for the three and nine month periods ended September 30, 1999).
Diluted earnings per share reflect the potential dilution that could occur if
outstanding stock options were exercised. Diluted earnings per share is computed
by dividing net income by the weighted average common shares outstanding for the
period plus the dilutive effect of options (83,039 and 81,675 shares for the
three and nine month periods ended September 30, 2000 and 125,266 and 111,366
for the three and nine month periods ended September 30, 1999).
4. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income for the three months ended September 30, 2000
and September 30, 1999 was $946,000 and $611,000, respectively, and for the nine
months ended September 30, 2000 and September 30 1999 was $2,481,000 and
$1,768,000, respectively.
5. ACQUISITIONS
On October 25, 2000, the Company completed its acquisition of North Coast Bank
(NCB) whereby NCB will become a subsidiary of the Company. Each share of NCB
will be exchanged for .9644 of a share of the Company's common stock. The merger
will be accounted for as a pooling of interests, and the effects of conforming
the accounting policies of NCB to those of the Company are not expected to be
material.
Selected financial information for the combining companies for the three and
nine month periods ended September 30, 2000 is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
2000 2000
(In thousands) --------------- ---------------
<S> <C> <C>
Net interest income:
American River Holdings and Subsidiaries $ 2,652 $ 7,635
North Coast Bank 817 2,274
--------------- ---------------
Combined $ 3,469 9,909
=============== ===============
Net income:
American River Holdings and Subsidiaries $ 792 $ 2,314
North Coast Bank 124 349
--------------- ---------------
Combined $ 916 2,663
=============== ===============
Basic Earnings Per Share $ .40 $ 1.18
=============== ===============
Diluted Earnings Per Share $ .38 $ 1.12
=============== ===============
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF AMERICAN RIVER HOLDINGS
The following is American River Holdings (the "Company") management's
discussion and analysis of the significant changes in balance sheet accounts for
September 30, 2000, December 31, 1999 and September 30, 1999 and income and
expense accounts for the three and nine-month periods ended September 30, 2000
and 1999. The discussion is designed to provide a better understanding of
significant trends related to the Company's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity.
In addition to the historical information contained herein, this report
on Form 10-Q contains certain forward-looking statements. The reader of this
report should understand that all such forward-looking statements are subject to
various uncertainties and risks that could affect their outcome. The Company's
actual results could differ materially from those suggested by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, variances in the actual versus
projected growth in assets, return on assets, loan losses, expenses, rates
charged on loans and earned on securities investments, rates paid on deposits,
competition effects, fee and other noninterest income earned, general economic
conditions-nationally, regionally and in the operating market areas of the
Company, changes in the regulatory environment, changes in business conditions
and inflation, changes in securities markets, as well as other factors. This
entire report should be read to put such forward-looking statements in context.
To gain a more complete understanding of the uncertainties and risks involved in
the Company's business, this report should be read in conjunction with the
Company's Rule 424(b)(3) prospectus filed with the Commission on August 10, 2000
pursuant to the Company's registration statement on Form S-4, number 333-36326.
Interest income and net interest income are presented on a fully
taxable equivalent basis (FTE) within management's discussion and analysis.
GENERAL DEVELOPMENT OF BUSINESS
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company was incorporated under the laws of
the State of California in 1995. As a bank holding company, the Company is
authorized to engage in the activities permitted under the Bank Holding Company
Act of 1956, as amended, and regulations thereunder. Its principal office is
located at 1545 River Park Drive, Suite 107, Sacramento, California 95815 and
its telephone number is (916) 565-6100.
The Company owns 100% of the issued and outstanding common shares of
American River Bank (the "Bank"). The Bank was incorporated and commenced
business in Fair Oaks, California, in 1983. The Bank accepts checking and
savings deposits, offers money market deposit accounts and certificates of
deposit, makes secured and unsecured commercial, secured real estate, and other
installment and term loans and offers other customary banking services. The
Company also owns 100% of First Source Capital formed in July 1999 to conduct
lease financing for most types of business assets, from computer software to
heavy earth-moving equipment. Specific leasing programs are tailored for vendors
of equipment in order to increase their sales. First Source Capital acts as a
lease broker and receives a fee for each lease recorded on the books of the
party acting as the funding source.
In March of 2000, the Company announced a merger with North Coast Bank
N.A. ("North Coast"), whereby North Coast would become a subsidiary of the
Company. At September 30, 2000, North Coast had assets of $58.4 million and
operated out of three branches in the Santa Rosa, California area. The
transaction calls for .9644 of a share of the Company's common stock to be
exchanged for each outstanding share of North Coast's common stock. The
transaction closed on October 25, 2000 and will be accounted for as a
pooling of interests.
8
<PAGE>
OVERVIEW
The Company recorded net income of $792,000 for the quarter ended
September 30, 2000, which was a 12.0% increase over the $707,000 reported for
the same period of 1999. Excluding merger expenses (adjusted for taxes), net
income would have been $875,000 or an increase of 23.8%. Diluted earnings per
share for the third quarter of 2000 were $0.42 versus $0.37 for the third
quarter of 1999. Excluding merger expenses (adjusted for taxes), diluted
earnings per share for the third quarter of 2000 would have been $0.47. The
return on equity (ROE) and the return on average assets (ROA) for the third
quarter of 2000 were 17.11% and 1.51%, respectively, as compared to 17.53% and
1.53%, respectively, for the same period in 1999. Excluding merger expenses, the
ROE and ROA would have been 18.90% and 1.67%, respectively. The net income for
the quarter ended September 30, 2000 includes after-tax merger related expenses
of $83,000. There were no merger related expenses for the quarter ended
September 30, 1999.
Net income for the nine months ended September 30, 2000 and 1999 was
$2,314,000 and $2,095,000, respectively, with diluted earnings per share of
$1.23 and $1.08, respectively. Excluding merger expenses (adjusted for taxes),
net income would have been $2,502,000 and diluted earnings per share would have
been $1.33, increases of 19.4% and 23.1%, respectively, over the nine months of
1999. For the nine months of 2000, ROE was 17.53% and ROA was 1.53% as compared
to 17.67% and 1.57% for the same period in 1999. The net income for the nine
months ended September 30, 2000 includes after-tax merger related expenses of
$188,000. There were no merger related expenses for the nine months ended
September 30, 1999.
The Company increased assets by $22,686,000 (12.1%) from September 30,
1999 to $210,466,000 at September 30, 2000. Net loans totaled $132,678,000, up
$23,161,000 (21.2%) from the ending balances on September 30, 1999. Deposit
balances at September 30, 2000 totaled $188,189,000, up $19,928,000 (11.8%) from
the year earlier balances. The deposit growth included $5,000,000 of State of
California certificates of deposit placed in the Bank in December 1999.
American River Holdings ended the third quarter of 2000 with a Tier 1
capital ratio of 12.0% and a total risk-based capital ratio of 13.2% versus
11.6% and 12.8%, respectively, at December 31, 1999.
Table One below provides a summary of the components of net income for
the periods indicated:
<TABLE>
<CAPTION>
TABLE ONE: COMPONENTS OF NET INCOME
------------------------------------------------------------------------------------------------------
For the three For the nine
months ended months ended
September 30, September 30,
---------------------- ----------------------
(In thousands, except percentages) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net interest income* $ 2,690 $ 2,334 $ 7,749 $ 6,933
Provision for loan losses (121) (109) (349) (297)
Non-interest income 475 394 1,428 1,063
Non-interest expense (includes merger expenses
of $124 and $296 for the three and nine months
ended September 30, 2000 and $0 in 1999) (1,712) (1,464) (4,962) (4,242)
Provision for income taxes (502) (417) (1,438) (1,284)
Tax equivalent adjustment (38) (31) (114) (78)
--------- --------- --------- ---------
Net income $ 792 $ 707 $ 2,314 $ 2,095
========= ========= ========= =========
------------------------------------------------------------------------------------------------------
Average total assets $ 208.4 $ 183.9 $ 202.6 $ 177.8
Net income (annualized) as a percentage
of average total assets 1.51% 1.53% 1.53% 1.57%
Net income (annualized) as a percentage of
of average total assets excluding merger
expenses (adjusted for taxes) 1.67% 1.53% 1.65% 1.57%
------------------------------------------------------------------------------------------------------
</TABLE>
* Fully taxable equivalent basis (FTE)
9
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income represents the excess of interest and fees earned
on interest earning assets (loans, securities, federal funds sold and
investments in time deposits) over the interest paid on deposits and borrowed
funds. Net interest margin is net interest income expressed as a percentage of
average earning assets.
The Company's net interest margin was 5.60% for the three months ended
September 30, 2000, 5.46% for the three months ended September 30, 1999, 5.55%
for the nine months ended September 30, 2000 and 5.64% for the nine months ended
September 30, 1999.
The fully taxable equivalent interest income component increased from
$3,415,000 for the three months ended September 30, 1999 to $4,273,000 for the
three months ended September 30, 2000, representing a 25.1% increase. Total
interest income increased from $10,050,000 for the nine months ended September
30, 1999, to $12,080,000 for the nine months ended September 30, 2000,
representing a 20.2% increase. The increase in the fully taxable equivalent
interest income for the first nine months of 2000 compared to the same period in
1999 is broken down by rate (up $703,000) and volume (up $1,327,000). The rate
increase can be attributed to six rate increases implemented by the Bank over
the past fifteen months in response to actions made by the Federal Reserve Board
increases in the Federal Funds and Discount rates. The volume increase was the
result of a 13% increase in earning assets primarily the result of a
concentrated effort on business lending and the effects of a strong local
market. Average loan balances were up 11.5% and average investment securities
balances were up 29.6% for the nine months ended September 30, 2000. Average
earning assets were up 12.5% in the third quarter of 2000 compared to the third
quarter of 1999, representing a $858,000 increase in interest income. The
increase in earning assets is comprised of loans (up 22.8%) and investment
securities (up 5.4%). The average yield on earning assets increased from 7.98%
in 1999 to 8.90% in 2000, representing a $317,000 increase.
The average balances on interest bearing liabilities were $18,745,000
(15.5%) higher in the third quarter of 2000 versus the same quarter in 1999. The
higher balances accounted for $170,000 of the increase in interest expense.
Rates paid on interest bearing liabilities increased 96 basis points on a
quarter over quarter basis and accounted for $332,000 of the interest expense
increase for the three month period. Interest expense for the nine-month period
increased $1,214,000 (38.9%) from the expense in the same period in 1999. Volume
increases in deposits and borrowings added $581,000 of interest expense. Overall
average rates paid on interest-bearing liabilities in the first nine months of
2000 increased 68 basis points to 4.24% from the same period in 1999. The
interest expense increase attributable to the higher rates was $633,000. For the
nine-month period ending September 30, 2000, net interest income increased
$816,000 (11.8%) over the first nine months of 1999.
Table Two, Analysis of Net Interest Margin on Earning Assets, and Table
Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses,
are provided to enable the reader to understand the components and past trends
of the Bank's interest income and expenses. Table Two provides an analysis of
net interest margin on earning assets setting forth average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid and
average rates earned and paid; and the net interest margin on earning assets.
Table Three sets forth a summary of the changes in interest income and interest
expense from changes in average asset and liability balances (volume) and
changes in average interest rates.
10
<PAGE>
<TABLE>
<CAPTION>
TABLE TWO: ANALYSIS OF NET INTEREST MARGIN ON EARNING ASSETS
---------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2000 1999
------------------------------ -------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $134,285 $ 3,357 9.95% $109,316 $ 2,534 9.20%
Taxable investment
securities 37,269 593 6.33% 36,807 540 5.82%
Tax-exempt investment
securities (2) 8,999 147 6.51% 7,209 119 6.53%
Corporate stock 994 20 7.83% 811 16 7.92%
Federal funds sold 4,069 65 6.36% 10,492 134 5.07%
Investments in time deposits 5,378 91 6.73% 5,069 72 5.64%
-------- -------- -------- --------
Total earning assets 190,994 4,273 8.90% 169,704 3,415 7.98%
-------- --------
Cash & due from banks 13,615 11,792
Other assets 3,822 2,434
-------- --------
$208,431 $183,930
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 71,243 606 3.38% $ 59,597 353 2.35%
Savings 8,028 52 2.58% 9,008 50 2.20%
Time deposits 57,581 884 6.11% 50,024 646 5.12%
Other borrowings 2,662 41 6.13% 2,140 32 5.93%
-------- -------- -------- --------
Total interest bearing
liabilities 139,514 1,583 4.51% 120,769 1,081 3.55%
-------- --------
Demand deposits 49,544 46,244
Other liabilities 955 913
-------- --------
Total liabilities 190,013 167,926
Shareholders' equity 18,418 16,004
-------- --------
$208,431 $183,930
======== ========
Net interest income & margin (3) $ 2,690 5.60% $ 2,334 5.46%
======== ===== ======== =====
</TABLE>
(1) Loan interest includes loan fees of $61,000 and $68,000 during the three
months ending September 30, 2000 and September 30, 1999, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in quarter (92 for
September 30, 2000 and 92 for September 30, 1999) and annualized to actual
days in year (366 for 2000 and 365 for 1999).
11
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 1999
------------------------------ -------------------------------
(Taxable Equivalent Basis) Avg Avg Avg Avg
(In thousands, except percentages) Balance Interest Yield (4) Balance Interest Yield (4)
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets
Loans (1) $126,889 $ 9,233 9.72% $113,775 $ 7,856 9.23%
Taxable investment
securities 41,577 1,964 6.31% 32,800 1,427 5.82%
Tax-exempt investment
securities (2) 8,966 441 6.58% 6,148 293 6.36%
Corporate stock 992 61 8.15% 827 47 7.63%
Federal funds sold 2,437 117 6.41% 5,786 213 4.92%
Investments in time deposits 5,488 264 6.43% 5,047 214 5.67%
-------- -------- -------- --------
Total earning assets 186,349 12,080 8.66% 164,383 10,050 8.17%
-------- --------
Cash & due from banks 12,373 11,228
Other assets 3,922 2,231
-------- --------
$202,644 $177,842
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Interest bearing liabilities:
NOW & MMDA $ 66,249 1,472 2.97% $ 58,245 1,019 2.34%
Savings 8,155 146 2.39% 8,072 136 2.25%
Time deposits 58,045 2,522 5.80% 48,515 1,857 5.12%
Other borrowings 3,966 191 6.43% 2,309 105 6.08%
-------- -------- -------- --------
Total interest bearing
liabilities 136,415 4,331 4.24% 117,141 3,117 3.56%
-------- --------
Demand deposits 47,363 43,899
Other liabilities 1,237 948
-------- --------
Total liabilities 185,015 161,988
Shareholders' equity 17,629 15,854
-------- --------
$202,644 $177,842
======== ========
Net interest income & margin (3) $ 7,749 5.55% $ 6,933 5.64%
======== ===== ======== =====
</TABLE>
(1) Loan interest includes loan fees of $186,000 and $231,000 during the nine
months ending September 30, 2000 and September 30, 1999, respectively.
(2) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
(4) Average yield is calculated based on actual days in period (274 for
September 30, 2000 and 273 for September 30, 1999) and annualized to actual
days in year (366 for 2000 and 365 for 1999).
12
<PAGE>
TABLE THREE: ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND
EXPENSES
--------------------------------------------------------------------------------
(In thousands) Three Months Ended September 30, 2000 over 1999
Increase (decrease) due to change in:
Interest-earning Assets: Volume Rate (4) Net Change
-------- -------- ----------
Net loans (1)(2) $ 579 $ 244 $ 823
Taxable investment securities 7 46 53
Tax exempt investment securities (3) 29 (1) 29
Corporate stock 4 -- 3
Federal funds sold (82) 13 (69)
Investment in time deposits 4 15 19
-------- -------- --------
Total 541 317 858
-------- -------- --------
Interest-bearing liabilities:
Demand deposits 69 184 253
Savings deposits (5) 7 2
Time deposits 98 140 238
Other borrowings 8 1 9
-------- -------- --------
Total 170 332 502
-------- -------- --------
Interest differential $ 371 $ (15) $ 356
======== ======== ========
--------------------------------------------------------------------------------
(In thousands) Nine Months Ended September 30, 2000 over 1999
Increase (decrease) due to change in:
Interest-earning Assets: Volume Rate (4) Net Change
-------- -------- ----------
Net loans (1)(2) $ 906 $ 471 $ 1,377
Taxable investment securities 382 155 537
Tax exempt investment securities (3) 134 15 149
Corporate stock 9 4 13
Federal funds sold (123) 27 (96)
Investment in time deposits 19 31 50
-------- -------- --------
Total 1,327 703 2,030
-------- -------- --------
Interest-bearing liabilities:
Demand deposits 140 313 453
Savings deposits 1 9 10
Time deposits 365 300 665
Other borrowings 75 11 86
-------- -------- --------
Total 581 633 1,214
-------- -------- --------
Interest differential $ 746 $ 70 $ 816
======== ======== ========
--------------------------------------------------------------------------------
(1) The average balance of non-accruing loans is immaterial as a percentage of
total loans and, as such, has been included in net loans.
(2) Loan fees of $61,000 and $68,000 during the three months ended September
30, 2000 and 1999, respectively, and $186,000 and $231,000 for the nine
months ended September 30, 2000 and 1999, respectively, have been included
in the interest income computation.
(3) Includes taxable-equivalent adjustments that primarily relate to income on
certain securities that is exempt from federal income taxes. The effective
federal statutory tax rate was 34% for the periods presented.
(4) The rate/volume variance has been included in the rate variance.
13
<PAGE>
PROVISION FOR LOAN LOSSES
The Bank provided $121,000 for loan losses for the third quarter of
2000 as compared to $109,000 for the third quarter of 1999. Net loan charge-offs
for the three months ended September 30, 2000 were $2,000 as compared to a
$41,000 for the three months ended September 30, 1999. For the first nine months
of 2000, the Bank made provisions for loan losses of $349,000 and net loan
charge-offs were $30,000 or .03% of average loans outstanding. This compares to
provisions for loan losses of $297,000 and net loan charge-offs of $44,000 or
.05% of average loans outstanding for the first nine months of 1999. The
increase in the provision during 2000 as compared to 1999 was primarily related
to the growth in the loan portfolio.
NONINTEREST INCOME
Noninterest income was up $81,000 (20.6%) to $475,000 for the three
months ended September 30, 2000 as compared to $394,000 for the three months
ended September 30, 1999. The increase in noninterest income for the quarter can
be attributed to an increase in accounts receivable servicing (up $34,000 or
44.2%) and revenue of $42,000 from First Source Capital, compared to $6,000 in
the third quarter of 1999. For the nine months ended September 30, 2000,
noninterest income was up $365,000 (34.3%) to $1,428,000. Increases were in
accounts receivable servicing (up $128,000 or 73.1%) and fees from sales of
Non-Insured Investment Products (up $52,000 or 56.5%). These increases were
offset by a decrease of $12,000 (11.4%) in loan origination fees from the Bank's
residential lending division. The increase in accounts receivable servicing was
a result of two new clients and increasing average accounts receivable balances
outstanding from $1,317,000 in the first nine months of 1999 to $2,456,000
(86.5%) in the first nine months of 2000. The residential lending division
experienced a decrease in loan volume as a direct result of an increase in
mortgage rates, which caused the number of refinances to decrease.
NONINTEREST EXPENSE
Noninterest expenses increased $248,000 (16.9%) to a total of
$1,712,000 in the third quarter of 2000 versus the $1,464,000 recorded in the
third quarter of 1999. Salary and employee benefits increased $74,000 (8.5%);
with $13,000 of the increase related to salaries in First Source Capital which
was formed in the third quarter of 1999. Other increases included higher benefit
costs and normal salary increases. On a quarter over quarter basis, occupancy
and fixed asset expenses were higher by $8,000 (4.6%) due to annual rent
increases. Merger related expenses were $124,000 during the quarter compared to
$0 in the third quarter of 1999. The expenses relate to the previously announced
merger with North Coast Bank, N.A. Merger expenses represent 50% of the $248,000
increase in noninterest expense. Other expenses for the third quarter of 2000
were $457,000 for an increase of $42,000 (10.1%) over the prior year quarter.
The overhead efficiency ratios (fully tax equivalent) for the 2000 and 1999
third quarters were 54.1% and 53.7%, respectively. Excluding merger expenses the
overhead efficiency ratio (fully tax equivalent) would have been 50.2% for the
quarter. Noninterest expenses for the nine-month period ended September 30, 2000
were $4,962,000 versus $4,242,000 for the same period in 1999. Salaries and
benefits increased $294,000 (11.5%) due to the new staff at First Source
Capital, higher benefit costs and normal salary increases. Premises and fixed
asset expenses were up $29,000 (5.8%). Merger related expenses were $296,000
during the period compared to $0 in the nine months ended September 30, 1999.
Merger expenses represent 41% of the $720,000 increase in noninterest expense.
Other expenses increased $101,000 (8.5%). The overhead efficiency ratio (fully
tax equivalent) for the first nine-months of 2000 was 54.1% as compared to 53.1%
in the same period of 1999. Excluding merger expenses the overhead efficiency
ratio (fully tax equivalent) would have been 50.8% for the nine months ended
September 30, 2000.
PROVISION FOR INCOME TAXES
The effective tax rate for the third quarter and first nine-months of
2000 was 38.8% and 38.3%, respectively, versus 37.1% for the third quarter and
38.0% for the first nine-months of 1999.
14
<PAGE>
BALANCE SHEET ANALYSIS
The Company's total assets were $210,466,000 at September 30, 2000 as
compared to $187,780,000 at September 30, 1999, representing an increase of
12.1%. The average balances of total assets for the nine months ended September
30, 2000 was $202,644,000 which represents an increase of $24,802,000 or 14.0%
over the $177,842,000 at September 30, 1999. Total average assets for the third
quarter of 2000 were $208,431,000 compared to $183,930,000 during the third
quarter of 1999.
LOANS
The Bank concentrates its lending activities in four principal areas:
1) commercial loans; 2) real estate mortgage loans; 3) real estate construction
loans (both commercial and residential); and 4) consumer loans. Real estate
mortgage loans are generally secured by improved commercial property, with
original maturities of 5-10 years. At September 30, 2000, these four categories
accounted for approximately 27%, 56%, 13%, and 4%, respectively, of the Bank's
loan portfolio. This mix was relatively unchanged compared to 23%, 55%, 18%, and
4% at September 30, 1999. Continuing strong economic activity in the Bank's
market area, combined with ongoing marketing efforts, offset by normal loan
paydowns and payoffs, resulted in net increases in loan balances for all loan
categories with the exception of Real Estate Construction. Over the past year
the Bank has made a concentrated effort to increase Commercial loans. In
addition, the Bank continues to be active in the Real Estate Construction area,
however, normal paydowns have exceeded new fundings. As a result, the
outstanding balance of construction loans decreased from $19,607,000 at
September 30, 1999 to $17,408,000 at September 30, 2000. Table Four below
summarizes the composition of the loan portfolio as of September 30, 2000,
September 30, 1999 and December 31, 1999.
TABLE FOUR: LOAN PORTFOLIO COMPOSITION
--------------------------------------------------------------------------------
September 30 December 31,
--------------------------- ------------
(In thousands) 2000 1999 1999
--------------------------------------------------------------------------------
Commercial $ 36,498 $ 25,280 $ 30,265
Real estate:
Mortgage 76,155 61,920 62,867
Construction 17,408 19,607 21,307
Consumer 4,963 4,619 4,859
Deferred loan fees (389) (294) (311)
--------------------------------------------------------------------------------
Total loans 134,635 111,132 118,987
Allowance for
loan losses (1,957) (1,615) (1,679)
--------------------------------------------------------------------------------
Total net loans $132,678 $109,517 $117,308
================================================================================
The majority of the Bank's loans are direct loans made to individuals
and local businesses. The Bank relies substantially on local promotional
activity, personal contacts by bank officers, directors and employees to compete
with other financial institutions. The Bank makes loans to borrowers whose
applications include a sound purpose and a viable primary repayment source
generally backed by a secondary source of repayment.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Consumer loans include a range of traditional consumer loan products offered by
the Bank such as personal lines of credit and loans to finance purchases of
autos, boats, recreational vehicles, mobile homes and various other consumer
items. Construction loans are generally composed of commitments to customers
within the Bank's service area for construction of both commercial properties
and custom and semi-custom single family residences. Other real estate loans
consist primarily of loans secured by first trust deeds on commercial and
residential properties typically with maturities from 3 to 10 years and original
loan to value ratios generally from 70% to 80%. In general, except in the case
of loans with SBA guarantees, the Bank does not make long-term mortgage loans;
however, the Bank has a residential lending division to assist customers in
securing most forms of longer term single-family mortgage financing.
15
<PAGE>
Average net loans during the three months ended September 30, 2000 were
$134,285,000 which represents a $24,968,000 (or 22.8%) increase over the average
of $109,316,000 during the three months ended September 30, 1999. Average loans
for the nine months ended September 30, 2000 were $126,889,000 representing an
increase of $13,114,000 or 11.5% over the same period in 1999. Loan growth in
2000 resulted from a favorable economy in the Bank's market area, new borrowers
developed through the Bank's marketing efforts and credit extensions expanded to
existing borrowers.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis
through a credit culture that emphasizes excellent credit quality, extensive
internal monitoring and established formal lending policies. Additionally, the
Company contracts with an outside loan review consultant to periodically review
the existing loan portfolio. Management believes its ability to identify and
assess risk and return characteristics of the Company's loan portfolio is
critical for profitability and growth. Management strives to continue its
emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. With this in mind, management has
designed and implemented a comprehensive loan review and grading system that
functions to continually assess the credit risk inherent in the loan portfolio.
Ultimately, credit quality may be influenced by underlying trends in
economic and business cycles. The Company's business is concentrated in the
Sacramento Metropolitan Statistical Area, which is a diversified economy, but
with a large State of California government presence and employment base. The
Company has significant extensions of credit and commitments to extend credit
which are secured by real estate. The ultimate recovery of these loans is
generally dependent on the successful operation, sale or refinancing of the real
estate. The Company monitors the effects of current and expected market
conditions and other factors on the collectibility of real estate loans. The
more significant factors management considers involve the following: lease,
absorption and sale rates; real estate values and rates of return; operating
expenses; inflation; and sufficiency of collateral independent of the real
estate including, in limited instances, personal guarantees.
At September 30, 2000, approximately $93,563,000 or 70% of the Bank's
loan portfolios constituted real estate loans primarily secured by the
underlying real estate. The ability of the Bank to continue to originate real
estate secured loans may be impaired by adverse changes in local and regional
economic conditions in the real estate market, increasing interest rates, or by
acts of nature, including earthquakes and flooding. These events could have a
material adverse impact on the value of the collateral resulting in increases in
loan losses, the allowance for loan losses and other real estate, which could
adversely impact the results of operations and financial performance of the Bank
and the Company.
In extending credit and commitments to borrowers, the Company generally
requires collateral and/or guarantees as security. The repayment of such loans
is expected to come from cash flow or from proceeds from the sale of selected
assets of the borrowers. The Company's requirement for collateral and/or
guarantees is determined on a case-by-case basis in connection with management's
evaluation of the credit-worthiness of the borrower. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment,
income-producing properties, residences and other real property. The Company
secures its collateral by perfecting its interest in business assets, obtaining
deeds of trust, or outright possession among other means.
Management believes that its lending policies and underwriting
standards will tend to minimize losses in an economic downturn; however, there
is no assurance that losses will not occur under such circumstances. The
Company's loan policies and underwriting standards include, but are not limited
to, the following: (1) maintaining a thorough understanding of the Company's
service area and originating a significant majority of its loans within that
area, (2) maintaining a thorough understanding of borrowers' knowledge,
capacity, and market position in their field of expertise, (3) basing real
estate loan approvals not only on market demand for the project, but also on the
borrowers' capacity to support the project financially in the event it does not
perform to expectations (whether sale or income performance), and (4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by the
Company's lending officers.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
Management generally places loans on nonaccrual status when they become
90 days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management, collection
appears unlikely. Table Five below sets forth nonaccrual loans and loans past
due 90 days or more as of September 30, 2000 and 1999, and as of, December 31,
1999.
16
<PAGE>
TABLE FIVE: NON-PERFORMING LOANS
--------------------------------------------------------------------------------
September 30, December 31,
----------------- ------------
(In thousands) 2000 1999 1999
--------------------------------------------------------------------------------
Past Due 90 days or more and still accruing:
Commercial $ -- $ 421 $ --
Real estate -- -- --
Consumer and other -- -- --
--------------------------------------------------------------------------------
Nonaccrual:
Commercial 24 65 30
Real estate -- 493 --
Consumer and other -- -- --
--------------------------------------------------------------------------------
Total non-performing loans $ 24 $ 979 $ 30
================================================================================
Nonperforming loans remain low at September 30, 2000. There were no
loan concentrations in excess of 10% of total loans not otherwise disclosed as a
category of loans as of September 30, 1999 or 2000 or December 31, 1999.
Management is not aware of any potential problem loans, which were accruing and
current at September 30, 2000, where serious doubt exists as to the ability of
the borrower to comply with the present repayment terms.
The recorded investments in troubled debt restructurings as of
September 30, 2000, December 31, 1999 and September 30, 1999 was $538,000,
$677,000 and $681,000, respectively.
ALLOWANCE FOR LOAN LOSSES ACTIVITY
The provision for loan losses is based upon management's evaluation of
the adequacy of the existing allowance for loans outstanding and loan
commitments. This allowance is increased by provisions charged to expense and
recoveries, and is reduced by loan charge-offs. Management determines an
appropriate provision based upon the interaction of three primary factors: (1)
loan portfolio growth, (2) a comprehensive grading and review formula for total
loans outstanding, and (3) estimated inherent credit risk in the portfolio.
Management reserves 2% of credit exposures graded "Special Mention",
15% of credits classified "Substandard" and 50% of credits classified
"Doubtful". These reserve factors may be adjusted for significant commercial and
real estate loans which are individually evaluated by management for specific
risk of loss. In addition, reserve factors ranging from 0.375% to 3.00% are
assigned to currently performing loans. These factors are assigned based on
management's assessment of the following for each identified loan type: (1)
inherent credit risk, (2) historical losses and, (3) where the Company has not
experienced losses, historical losses experienced by peer banks. Management also
computes specific and expected loss reserves for loan commitments to provide for
risks of loss inherent in the loan extension process. Finally, a residual
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. This residual component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used to
estimate losses in specifically graded loans and expected losses in the
performing portfolio.
The Bank's Loan Committee reviews the adequacy of the allowance for
loan losses at least quarterly to include consideration of the relative risks in
the portfolio and current economic conditions. The allowance is adjusted based
on that review if, in management's judgment, changes are warranted.
The allowance for credit losses totaled $1,957,000 or 1.45% of total
loans at September 30, 2000, $1,615,000 or 1.45% of total loans at September 30,
1999 and $1,679,000 or 1.41% of total loans at December 31, 1999. During the
first quarter of 2000, $41,000 was transferred out of the allowance for loan
loss account into a separate valuation reserve for the accounts receivable
servicing receivables. Table Six below summarizes, for the periods indicated,
the activity in the allowance for loan losses.
17
<PAGE>
<TABLE>
<CAPTION>
TABLE SIX: ALLOWANCE FOR LOAN LOSSES
----------------------------------------------------------------------------------------------
Three Months Nine Months
(In thousands, except for percentages) Ended Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average loans outstanding $ 134,285 $ 109,316 $ 126,889 $ 113,775
----------------------------------------------------------------------------------------------
Allowance for possible loan losses at
beginning of period $ 1,838 $ 1,547 $ 1,679 $ 1,362
Loans charged off:
Commercial (2) (45) (30) (50)
Real estate -- -- -- --
Installment -- -- -- --
----------------------------------------------------------------------------------------------
Total (2) (45) (30) (50)
----------------------------------------------------------------------------------------------
Recoveries of loans previously Charged off:
Commercial -- 2 -- 4
Real estate -- -- -- --
Consumer -- 2 -- 2
----------------------------------------------------------------------------------------------
Total -- 4 -- 6
----------------------------------------------------------------------------------------------
Net loans (charged off) recovered (2) (41) (30) (44)
Amount transferred for accounts
Receivable servicing valuation
reserve -- -- (41) --
Additions to allowance charged
to operating expenses 121 109 349 297
----------------------------------------------------------------------------------------------
Allowance for possible loan
losses at end of period $ 1,957 $ 1,615 $ 1,957 $ 1,615
----------------------------------------------------------------------------------------------
Ratio of net charge-offs to average
loans outstanding .00% .15% .03% .05%
Provision of allowance for possible
loan losses to average loans
outstanding .36% .40% .37% .35%
Allowance for possible loan losses to
loans net of deferred fees at end of
period 1.45% 1.45% 1.45% 1.45%
</TABLE>
It is the policy of management to maintain the allowance for loan
losses at a level adequate for known and inherent risks in the loan portfolio.
Based on information currently available to analyze inherent credit risk,
including economic factors, overall credit quality, historical delinquencies and
a history of actual charge-offs, management believes that the provision for
credit losses and the allowance are prudent and adequate. The Bank generally
makes monthly allocations to the allowance for loan losses. The budgeted
allocations are based on estimates of loss risk and loan growth. Adjustments may
be made based on differences from estimated loan growth, the types of loans
constituting this growth, changes in risk ratings within the portfolio, and
general economic conditions. However, no prediction of the ultimate level of
loans charged off in future years can be made with any certainty.
18
<PAGE>
OTHER REAL ESTATE
At September 30, 2000 and at December 31, 1999, the Company did not
have any other real estate ("ORE") properties. At September 30, 1999 the
Company's portfolio included one ORE property valued and recorded at $162,000.
DEPOSITS
At September 30, 2000, total deposits were $188,189,000 representing an
increase of $19,928,000 (11.8%) over the September 30, 1999 balance of
$168,261,000. State of California certificates of deposit accounted for
$5,000,000 of the deposit growth. The remainder of the increase in total
deposits is attributable to growth in noninterest-bearing demand and increased
balances in interest-bearing money market accounts as a result of a promotional
account.
CAPITAL RESOURCES
The current and projected capital position of the Company and the
impact of capital plans and long-term strategies is reviewed regularly by
management. The Company's capital position represents the level of capital
available to support continued operations and expansion.
In May of 1997, the Board of Directors of the Company authorized the
annual repurchase of up to five percent of the Company's common stock to lessen
the dilutive impact of issuing new shares in connection with annual
distributions of a five percent common stock dividend and the Company's stock
option plans. The Company acquired 77,000 shares of its common stock in the open
market during 1999. There were no repurchases made during the first nine months
of 2000.
The Company and the Bank are subject to regulations issued by the Board
of Governors of the Federal Reserve System and the FDIC, which require
maintenance of certain levels of capital. At September 30, 2000, shareholders'
equity was $18,870,000 representing an increase of $2,710,000 or 16.8% from the
$16,160,000 at September 30, 1999. The ratio of total risk-based capital to risk
adjusted assets was 13.2% at September 30, 2000 compared to 12.8% at December
31, 1999. Tier 1 risk-based capital to risk-adjusted assets was 12.0% at
September 30, 2000 and 11.6% at December 31, 1999.
Table Seven below lists the Company's actual capital ratios at
September 30, 2000 and December 31, 1999 as well as the well-capitalized ratios
required under regulatory definitions of capital adequacy.
<TABLE>
<CAPTION>
TABLE SEVEN: CAPITAL RATIOS
--------------------------------------------------------------------------------------------
Capital to Risk-Adjusted Assets At June 30, At December 31, Well-Capitalized
2000 1999 Regulatory Requirement
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leverage ratio 9.0% 9.2% 5.00%
Tier 1 Risk-Based Capital 11.9% 11.6% 6.00%
Total Risk-Based Capital 13.0% 12.8% 10.00%
</TABLE>
Capital ratios are reviewed on a regular basis to ensure that capital
exceeds the prescribed regulatory minimums and is adequate to meet future needs.
All ratios are in excess of the regulatory definition of "well capitalized" at
September 30, 2000 and December 31, 1999.
MARKET RISK MANAGEMENT
Overview. Market risk is the risk of loss from adverse changes in
market prices and rates. The Bank's market risk arises primarily from interest
rate risk inherent in its loan and deposit functions. The goal for managing the
assets and liabilities of the Bank is to maximize shareholder value and earnings
while maintaining a high quality balance sheet without exposing the Bank to
undue interest rate risk. The Board of Directors has overall responsibility for
the interest rate risk management policies. The Bank has an Asset and Liability
Management Committee (ALCO) which establishes and monitors guidelines to control
the sensitivity of earnings to changes in interest rates.
19
<PAGE>
Asset/Liability Management. Activities involved in asset/liability
management include but are not limited to lending, accepting and placing
deposits, other borrowings and investing in securities. Interest rate risk is
the primary market risk associated with asset/liability management. Sensitivity
of earnings to interest rate changes arises when yields on assets change in a
different time period or in a different amount from that of interest costs on
liabilities. To mitigate interest rate risk, the structure of the balance sheet
is managed with the goal that movements of interest rates on assets and
liabilities are correlated and contribute to earnings even in periods of
volatile interest rates. The asset/liability management policy sets limits on
the acceptable amount of variance in net interest margin and market value of
equity under changing interest environments. The Bank uses simulation models to
forecast earnings, net interest margin and market value of equity.
Simulation of earnings is the primary tool used to measure the
sensitivity of earnings to interest rate changes. Using computer modeling
techniques, the Bank is able to estimate the potential impact of changing
interest rates on earnings. A balance sheet forecast is prepared quarterly using
inputs of actual loans, securities and interest bearing liabilities (i.e.
deposits/borrowings) positions as the beginning base. The forecast balance sheet
is processed against seven interest rate scenarios. The scenarios include a 300,
200 and 100 basis point rising rate forecast, a flat rate forecast and a 300,
200 and 100 basis point falling rate forecast which take place within a one year
time frame. The net interest income is measured during the year assuming a
gradual change in rates over the twelve-month horizon. The Bank's net interest
income, as forecast below, was modeled utilizing a forecast balance sheet
projected from September 30, 2000 balances.
Table Eight below summarizes the effect on net interest income (NII) of
a +/-300, +/-200 and +/-100 basis point change in interest rates as measured
against a constant rate (no change) scenario.
TABLE EIGHT: INTEREST RATE RISK SIMULATION OF NET INTEREST AS OF
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
% Change in NII $ Change in NII
from Current from Current
12 Month Horizon 12 Month Horizon
---------------- ----------------
Variation from a constant
rate scenario
+300bp 3.8 % $ 442
+200bp 2.4 % $ 283
+100bp 1.2 % $ 140
-100bp (0.7)% $ (78)
-200bp (1.4)% $(160)
-300bp (2.1)% $(249)
The simulations of earnings do not incorporate any management actions,
which might moderate the negative consequences of interest rate deviations.
Therefore, they do not reflect likely actual results, but serve as conservative
estimates of interest rate risk.
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on manufacturing, or other commercial concerns,
primarily because its assets and liabilities are largely monetary. In general,
inflation primarily affects the Company and the Bank through its effect on
market rates of interest, which affects the Bank's ability to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings which may be generated in the
future. In addition to its effects on interest rates, inflation increases
overall operating expenses. Inflation has not had a material effect upon the
results of operations of the Company and its subsidiaries during the periods
ending September 30, 2000 and 1999.
20
<PAGE>
LIQUIDITY
Liquidity management refers to the Company's ability to provide funds
on an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
the Company's liquidity position. Federal funds lines, short-term investments
and securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Company assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. Commitments to fund loans and outstanding
letters of credit at September 30, 2000, September 30, 1999 and December 31,
1999, were approximately $46,697,000 and $892,000, $39,992,000 and $1,698,000
and $42,540,000 and $2,311,000, respectively. Such loans relate primarily to
revolving lines of credit and other commercial loans, and to real estate
construction loans.
The Company's sources of liquidity consist of overnight funds sold to
correspondent banks, unpledged marketable investments and loans held for sale.
On September 30, 2000, consolidated liquid assets totaled $29.4 million or 14.0%
compared to $37.6 million or 18.7% of total assets on December 31, 1999. In
addition to liquid assets, the Bank maintains short term lines of credit with
correspondent banks. At September 30, 2000, September 30, 1999 and December 31,
1999, the Bank had $13,000,000, $11,000,000 and $11,000,000, respectively,
available under these credit lines. Additionally, the Bank is a member of the
Federal Home Loan Bank ("FHLB"). At September 30, 2000, September 30, 1999 and
December 31, 1999, the Bank could have arranged for up to $4,181,000, $5,515,000
and $4,624,000, respectively, in secured borrowings from the FHLB. The Bank also
has informal agreements with various other banks to purchase participations in
loans, if necessary. The Company serves primarily a business and professional
customer base and, as such, its deposit base is susceptible to economic
fluctuations. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits.
Liquidity is also affected by portfolio maturities and the effect of
interest rate fluctuations on the marketability of both assets and liabilities.
The Bank can sell any of its unpledged securities held in the Available-for-Sale
category to meet liquidity needs. The Bank has established a master repurchase
agreement with a correspondent bank to enable such transactions. The Bank can
also pledge securities to borrow from the Federal Reserve Bank and the FHLB.
The principal cash requirements of the Company are for expenses
incurred in the support of administration and operations. For nonbanking
functions, the Company is dependent upon the payment of cash dividends by the
Bank to service its commitments. The Company expects that the cash dividends
paid by the Bank to the Company will be sufficient to meet this payment
schedule.
OFF-BALANCE SHEET ITEMS
The Bank has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. As of September 30,
2000, September 30, 1999 and December 31, 1999, commitments to extend credit and
letters of credit were the only financial instruments with off-balance sheet
risk. The Bank has not entered into any contracts for financial derivative
instruments such as futures, swaps, options or similar instruments. Loan
commitments and letters of credit were $47,589,000, $41,690,000 and $44,851,000
at September 30, 2000, September 30, 1999 and December 31, 1999, respectively.
As a percentage of net loans these off-balance sheet items represent 35.9%,
38.1% and 38.2%, respectively.
21
<PAGE>
YEAR 2000
During 1998 and 1999, management of the Company focused the appropriate
resources to address the potential problems that could arise regarding the Year
2000 (Y2K) century date change. The Company's mission critical systems were
evaluated, modified as required and contingency plans were put into place should
the systems have experienced any failures. The century date change passed
without any operational difficulties. There are certain dates within the year
2000 that have been identified as critical processing dates. The first was
January 31, the end of the first month of the year, the second was February 29,
leap year day, the third was March 31, the end of the first quarter, the fourth
was October 10, the first date to require an 8-digit field (10/10/2000). The
Company did not experience any processing problems on those dates. One upcoming
date remains during the year, December 31, the end of the year. Those dates were
tested as part of the Y2K project. The Company does not anticipate having any
processing problems on those dates, however, failure by third parties adequately
to remediate Y2K issues could have an impact upon the Company, which is
impossible to quantify. Nevertheless, the Company currently expects that its Y2K
compliance efforts will be successful without material adverse effects on its
business.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued an exposure
draft of a proposed statement, "Business Combinations and Intangibles," in
September 1999 which included the elimination of "pooling of interests"
accounting. The result of this accounting change would be that all mergers
consummated after a designated date would be accounted for as "purchase"
transactions, resulting in the recognition of goodwill in any merger where the
purchase price exceeds the asset value of the acquired company. The FASB is in
the process of researching and discussing the accounting for goodwill and its
impact on the future reported income of merged companies. Additionally, in bank
mergers, the goodwill in a purchase accounting transaction would not be included
in the calculation of regulatory capital requirements. The FASB will
redeliberate the related issue of whether to retain the pooling method, but not
until it has reached a set of tentative decisions with respect to the accounting
for goodwill that will best meet the concerns of investors, creditors, and other
users of financial statements--as well as companies that prepare those reports.
The FASB expects to issue a final statement near the end of the first quarter of
2001.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
which was subsequently amended in June 1999 by FASB Statement No. 137 and in
June 2000 by FASB Statement No. 138. FASB Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that entities recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
FASB Statement No. 137 deferred the required adoption date to fiscal quarters of
all fiscal years beginning after June 15, 2000. FASB Statement No. 138 addresses
certain issues causing difficulties in implementing FASB Statement No. 133. The
implementation of these pronouncements is not expected to have a material effect
on the Company's financial statements.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This statement replaces FASB Statement No.
125 and revises certain of the standards for accounting for securitizations and
other transfers of financial assets and collateral and their related
disclosures. However, most of the provisions of FASB Statement No. 125 were
carried over without reconsideration. The statement will be applied
prospectively and is effective for the transfer and servicing of financial
assets and extinguishment of liabilities occurring after March 31, 2001. The
implementation of this pronouncement is not expected to have a material effect
on the Company's financial statements.
22
<PAGE>
SUBSEQUENT EVENT
On October 25, 2000 the Company consummated the merger pursuant to the
Agreement and Plan of Reorganization by and among the Company, ARH Interim
National Bank and North Coast, N.A., dated as of March 1, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
23
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
THE FOLLOWING ARE THE VOTING RESULTS OF THE REGISTRANT'S ANNUAL MEETING
OF THE SHAREHOLDERS HELD ON MAY 25, 2000:
PROPOSAL NO. 1. Approval of the Agreement and Plan of Reorganization
and Merger, dated March 1, 2000, among American River Holdings, North
Coast Bank, N.A. and ARH Interim National Bank.
Voted for: 1,169,856
Voted against: 28,890
Abstained: 9,223
PROPOSAL NO. 2. Approval of the American River Holdings 2000 Stock
Option Plan.
Voted for: 1,121,624
Voted against: 62,348
Abstained: 23,997
PROPOSAL NO. 3. Approval of the amendments to the American River
Holdings articles of incorporation and bylaws to provide for the
classification of the board of directors.
Voted for: 1,111,929
Voted against: 83,783
Abstained: 12,257
PROPOSAL NO. 4. Approval of the amendments to the American River
Holdings articles of incorporation and bylaws to eliminate cumulative
voting in the election of directors.
Voted for: 1,097,519
Voted against: 97,549
Abstained: 12,901
PROPOSAL NO. 5: Election of directors
On the proposal to elect Directors of American River Holdings,
Management's nominees, JAMES BURPO, WAYNE MATTHEWS, ROGER TAYLOR,
CHARLES FITE, DAVID TABER, STEPHEN WAKES, MARJORIE TAYLOR, SAM GALLINA
and WILLIAM YOUNG were elected as directors of AMERICAN RIVER HOLDINGS
for the period corresponding to the class designated and until their
successors are elected and qualified.
24
<PAGE>
PROPOSAL NO. 6: Approval of Perry-Smith LLP as independent accountants
for the fiscal year 2000.
Voted for: 1,587,177
Voted against 6,047
Abstained: 4,482
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Document Description
------ --------------------
(2.1) Agreement and Plan of Reorganization and Merger by and
among the Registrant, ARH Interim National Bank and North
Coast Bank, N.A., dated as of March 1, 2000 (included as
Annex A to the joint proxy statement/prospectus). **
(3.1) Articles of Incorporation, as amended. **
(3.2) Bylaws, as amended. **
(4.1) Specimen of the Registrant's common stock certificate. **
(10.1) Lease agreement between American River Bank and Spieker
Properties, L.P., a California limited partnership, dated
April 1, 2000, related to 1545 River Park Drive, Suite
107, Sacramento, California. **
(10.2) Lease agreement and addendum between American River Bank
and Bradshaw Plaza Group each dated January 31, 2000,
related to 9750 Business Park Drive, Sacramento,
California. **
(10.3) Lease agreement between American River Bank and Marjorie
G. Taylor dated April 5, 1984, and addendum dated July
16, 1997, related to 10123 Fair Oaks Boulevard, Fair
Oaks, California. **
(10.4) Lease agreement between American River Bank and
Sandalwood Land Company dated August 28, 1996, related
to 2240 Douglas Boulevard, Suite 100, Roseville,
California. **
(10.5) Lease agreement between American River Holdings and
Union Bank of California dated June 29, 1999, related
to 1540 River Park Drive, Suite 108, Sacramento,
California. **
25
<PAGE>
*(10.6) American River Holdings 1995 Stock Option Plan. **
*(10.7) Form of Nonqualified Stock Option Agreement under the
1995 Stock Option Plan. **
*(10.8) Form of Incentive Stock Option Agreement under the 1995
Stock Option Plan. **
*(10.9) American River Bank 401(k) Plan and amendment no. 1 dated
April 1, 1998. **
*(10.10) American River Holdings Stock Option Gross-Up Plan and
Agreement, as amended, dated May 20, 1998. **
*(10.11) American River Bank Deferred Compensation Plan dated May
1, 1998. **
*(10.12) American River Bank Deferred Fee Plan dated April 1,
1998. **
*(10.16) American River Bank Employee Severance Policy dated March
18, 1998. **
*(10.17) American River Bank Employee Stock Purchase Plan. **
*(10.18) Employment agreement with David T. Taber dated August 16,
2000.
*(10.19) Employment agreement with William L. Young dated August
16, 2000.
*(10.20) American River Holdings Incentive Compensation Plan Year
Ended December 31, 2000.
(21.1) The Registrant's only subsidiaries are American River
Bank and First Source Capital at September 30, 2000 and
North Coast Bank, N.A. as of October 25, 2000.
(27.1) Financial Data Schedule
* Denotes management contracts, compensatory plans or arrangements.
** Incorporated by reference to registrant's Registration Statement on
Form S-4 (No. 333-36326) filed with the Commission on May 5, 2000.
(b) Reports on Form 8-K
None
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN RIVER HOLDINGS
November 13, 2000
By: /s/ MITCHELL A. DERENZO
-----------------------------
Mitchell A. Derenzo
Chief Financial Officer
(Principal Financial and Accounting
Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
--------------------------------------------------------------------------------
10.18 Employment agreement with David T. Taber 29-37
dated August 16, 2000
10.19 Employment agreement with William L. Young 38-45
dated August 16, 2000
10.20 American River Holdings Incentive Compensation 46-53
Plan Year Ended December 31, 2000.
27.1 Financial Data Schedule 54
28
